Striking strength of the UK’s recovery
Richard Watts, co-Head of Strategy, UK Small & Mid Cap, discussed the emerging strength of the UK’s economic recovery, and data that perhaps reveals where some sectors have been de-rated too far.
What is now known as ‘Pfizer Monday’ (9th November 2020) when the successful trial data from the Pfizer/BioNTech vaccine was announced, set the scene for a recovery in stocks that had been most impacted by the pandemic. But the market dynamic since then has been dominated by more than just hospitality and leisure stocks, broadening out to ‘value’ stocks, industrials, and others.
So far in 2021 the laggards have been the stocks that were winners in 2020, but while some adjustment in portfolios has obviously been warranted, now is time for investors to trust in fundamental analysis and not simply shift from one momentum trade to another. Regardless of market trends, if companies can deliver on their earnings potential over time then that will be reflected in higher share prices.
Looking at the data in detail perhaps reveals areas where stock de-ratings may have been overdone. I like to look at retail sales data from the British Retail Consortium (BRC). Let’s not even bother comparing figures with 2020, given the massive distortion last year, but notably in April this year the BRC’s total retail sales data grew 7% compared to 2019 – that includes like-for-like sales growth of 25% in non-food retail, which still had many stores closed during April 2021.
It’s also worth highlighting that online retail sales are still growing at 20% yoy, even accounting for what you might expect was an online spending boom in the months after lockdown started in spring 2020. That should be encouraging for investors in online retail stocks, many of which have been significantly de-rated this year as the market looks elsewhere for growth, and in some cases are on their lowest valuations for years but with that strong underlying sales tailwind.
Elsewhere, it will be interesting in the coming weeks to see how well the restaurant industry recovers, as it is only this week that UK diners have been allowed to eat inside again. The travel industry’s recovery is further behind still, as only a very limited number of countries are on the UK’s ‘green’ travel list. So there will be multiple waves to the recovery across sectors as the pandemic situation gradually improves.
More broadly, what has really struck me is the strength of the UK’s recovery and in addition to the retail sales data unemployment is another example of that. The furlough schemes have supported jobs well, and HMRC data now shows five consecutive months of increased employment. This suggests to me that any predictions that unemployment could rise to 6% later this year (from 4.8% at the end of March) are probably unfounded and that the employment picture looks much stronger than many feared. This all sets the scene for a positive backdrop for UK equity markets in the coming months, and perhaps the stylistic shifts in recent months have left opportunities in their wake.
The Fed to hold course on dovish policy
Mark Nash, Fund Manager, Fixed Income, believes the notion that the Federal Reserve is going to turn hawkish early to quell the recent acceleration in inflation is far-fetched.
I expect central banks including the Federal Reserve (Fed) to remain dovish in the near term. Credibility is everything to the Fed and therefore it’s unlikely to change course quickly, in my view. I expect the Fed will continue to keep real rates generally low, preventing the dollar from rocketing higher like we saw in the first quarter and keeping financial conditions very easy to give reflation a good chance down the line.
Inflation expectations further out may seem quite high compared with the last five years, however these last five years have been a period of exceptionally low inflation pricing in the market and relative to previous history inflation is at the low end of that older range. The data is very messy but we are not seeing anything that is really a surprise. We are seeing a demand surge in a very brief period while the supply side really hasn’t fully reopened and there are labour shortages as people remain cautious about leaving their homes as we emerge from the pandemic and those workers remain supported by government employment support packages.
Inflation has been driven by sectors such as restaurants, hotels and holiday rentals as economies open but that should start to subside overtime. For inflation to be a sustainable issue, I believe wages would need to rise as longer term labour shortages emerge and at the moment they remain quite contained. In the same way that deflation discourages borrowing to spend and invest, inflation does the opposite. So the Fed will see this as a positive and not worry about near-term CPI, in my view.
In Europe, sovereign bonds are underperforming, which is a reflection of the reflationary environment moving as a global phenomena. As we go forward and yields start to rise, the market will begin to price more domestic fundamentals as their debt costs rise. Meanwhile the dollar will continue its decline, as long as real US yields remain low and the last 2-3 months will be a bit of a bad dream for risk markets – so I believe we can continue on the path where investors target emerging markets for alpha opportunities over coming months .
Taiwan: Making sense of the volatility
Jason Pidcock, Head of Strategy, Asian Income, comments on this year’s volatility in Taiwanese equities, China’s latest census data, and how global population growth impacts the environment.
Taiwan has been one of the most interesting markets of late. Last year, it was one of the best performing markets globally, up around 35% in US dollar terms. Taiwanese equities continued their strong run from January to the end of April, returning an additional 20%, but in the first half of May, the market fell sharply, before bouncing again this week.
So, what’s caused this year’s volatility? There were obviously lots of profits to be taken after such a strong 18 months, but I think May’s sell-off was largely down to two factors. First, Covid-19 cases have been picking up recently. Although Taiwan did very well in preventing the Covid-19 outbreak initially, with a remarkably low number of deaths, partly because of this its vaccination rate is very low, especially by developed market standards, at less than 0.5% of the population. Nevertheless, I remain confident that Taiwan will cope well with the recent rise in outbreaks, as it tends to deal with problems efficiently. Second, margin financing of buying equities by retail investors had reached extraordinarily high levels – the highest since the late 80s – so when markets started to roll over, that fed upon itself.
Overall, I continue to find many attractive long-term investment opportunities in Taiwan, in companies that are very robust in terms of earnings growth and balance sheet strength, with strong business models, and which offer high dividend yields.
Elsewhere, last week, China released its once-in-a-decade census data. While the headlines suggest its population is aging quite rapidly and that its workforce has started to shrink, I think it’s important to understand the underlying trends. The number of 18- to 60-year-olds is falling, but many people do not stop working at 60; furthermore, the number of qualified people has continued to grow, and therefore the number of productive workers has continued to grow. So, even though China’s median age has reached mid-30s and is rising, I don’t see this as a problem for Chinese growth.
Finally, as an active investor, I remain mindful of not only potential company-specific risks, but also political, systematic and environmental risks associated with my investment decisions. I suspect that, as people become increasingly aware of the ecological impact of population growth, we will start to see social change, with people choosing to have fewer children. As a result, over a couple of generations, the profile of the global population could change quite rapidly; countries that suffer emigration and a sharply falling population could face significant economic problems. From an investment perspective, this is a very long-term theme, but it is leading me to be more country-selective, and to remain wary of most countries in Southeast Asia and to favour places like Australia, as well as to avoid those sectors that are a strong play on very young populations. 27563
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